Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds’ share price has sunk in 2022, causing the bank’s dividend yield to leap. But can I really trust what City forecasters are predicting?

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Lloyds Banking Group (LSE: LLOY) has long been a popular choice for investors seeking big dividends. Today, the bank remains a hit with those seeking above-average dividend yields too. That’s despite the growing economic headwinds that threaten its operations. Currently, Lloyds’ dividend yield for 2022 sits at 5.6%, some way north of the FTSE 100’s 3.9% forward average.

Lloyds’ yield soars to 6.1% for 2023 amid predictions of sustained dividend growth too.

Dividend growth predicted

City analysts think Lloyds will pay a dividend of 2.35p per share in 2022 and 2.58p next year. That’s up from the 2p the bank paid investors last year. The question is whether these forecasts look realistic in the current climate.

On paper, those anticipated rewards certainly look within reach for investors. This year’s estimated dividend is predicted 2.7 times by anticipated earnings. The reading sits at a meaty 2.5 times for 2023 as well. Investing theory suggests a reading of 2 times and above leaves a wide margin for error.

Trouble in store?

That’s not to say that Lloyds is out of the woods. Britain’s economy is cooling rapidly as the cost-of-living crisis worsens and the threat to cyclical shares like this is rising.

Indeed, Goldman Sachs predicts a 45% chance of recession in the UK. At best it seems like banking stocks can expect a period of weak growth, one that could still create sluggish revenues growth and high loan impairments.

On the plus side Lloyds’ strong balance sheet could still help it deliver on current forecasts. Its CET1 capital ratio stood at 14.2% as of quarter one, still well above its target of 11%.

Its dividend outlook is also supported by the prospect of rolling interest rate rises.

More rate rises coming

Inflation is a double-edged sword for the likes of Lloyds. Sure, the consequent squeeze on living costs is smacking the broader economy. But it means that the Bank of England is also raising interest rates, allowing banks to make more money on their lending activities.

The market is overwhelmingly convinced that policymakers will continue hiking rates as well. Both Deutsche Bank and Goldman Sachs are predicting two rises of 50 basis points over the next few months.

Regulatory intervention?

The problem for the firm is that it might not be able to pay big dividends even if it wants to. That’s if the Bank of England (BoE) follows the European Central Bank’s lead.

The BoE on Thursday urged eurozone banks to consider the economic outlook when calculating the level of shareholder payouts. The ongoing war in Ukraine continues to give policymakers the jitters.

Remember that the central banks are happy to give the sector advice on this front. Both requested that financial firms delay or halt dividends and share buybacks during the height of the pandemic.

I think there’s a good chance Lloyds will pay the sort of big dividends brokers are expecting this year. However, I’m not so convinced the business will impress investors with giant dividends further out.

Given the rapidly-deteriorating economic situation I’d rather buy other dividend stocks right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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